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Voluntary Matching Grants can Forestall Social Dumping

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  • Jacques Drèze
  • Charles Figuières
  • Jean Hindriks

Abstract

The European economic integration leads to increasing mobility of factors, thereby threatening the stability of social transfer programs. This paper investigates the possibility to achieve by means of voluntary matching grants both the optimal allocation of factors and the optimal level of redistribution in the presence of factor mobility. We use a fiscal competition model a la Wildasin (1991) in which states differ in their technologies and preferences for redistribution. We first investigate a simple process in which the regulatory authority progressively raises the matching grants to the district choosing the lowest transfer and all districts respond optimally to the resulting change in transfers all around. This process is shown to increase total production and the level of reditribution. However it does not guarantee that all districts gain, nor that an efficient level of redistribution is attained. Assuming complete information among districts, we first derive the willingness of each district to match the contribution of other districts and we show that the aggregate willingness to pay for matching rates converges to zero when both the efficient level of redistribution and the efficient allocation of factors are achieved. We then describe the ajustment process for the matching rates that will lead districts to the efficient outcome and guarantee that everyone will gain.

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Bibliographic Info

Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 06-13.

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Length: 19 pages
Date of creation: Nov 2006
Date of revision: Nov 2006
Handle: RePEc:lam:wpaper:06-13

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  1. Charles Figuieres & Jean Hindriks, 2001. "Matching Grants and Ricardian Equivalence," Working Papers 440, Queen Mary, University of London, School of Economics and Finance.
  2. Charles Brown & Wallace E. Oates, 1985. "Assistance to the Poor in a Federal System," NBER Working Papers 1715, National Bureau of Economic Research, Inc.
  3. Charles Figuieres & Jean Hindriks & Gareth D. Myles, 2004. "Revenue Sharing versus Expenditure Sharing in a Federal System," International Tax and Public Finance, Springer, vol. 11(2), pages 155-174, 03.
  4. Hans-Werner Sinn, 2002. "The New Systems Competition," NBER Working Papers 8747, National Bureau of Economic Research, Inc.
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  6. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," Munich Reprints in Economics 19846, University of Munich, Department of Economics.
  7. David E. Wildasin, 2000. "Factor Mobility and Fiscal Policy in the EU: Policy Issues and Analytical Approaches," CESifo Working Paper Series 344, CESifo Group Munich.
  8. Wildasin, D.E., 1987. "Nash equilibria in models of fiscal competition," CORE Discussion Papers 1987020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  12. Andreas Pfingsten & Andreas Wagener, 1997. "Centralized vs. Decentralized Redistribution: A Case for Interregional Transfer Mechanisms," International Tax and Public Finance, Springer, vol. 4(4), pages 429-451, November.
  13. Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
  14. HINDRIKS, Jean & MYLES, Gareth D., 2001. "Strategic inter-regional transfers," CORE Discussion Papers 2001004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Hindriks, J., 1998. "Tax versus Transfer Competition," Discussion Papers 9808, Exeter University, Department of Economics.
  16. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  17. Kevin Roberts, 1999. "Dynamic voting in clubs," LSE Research Online Documents on Economics 19349, London School of Economics and Political Science, LSE Library.
  18. Guttman, Joel M, 1978. "Understanding Collective Action: Matching Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 251-55, May.
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